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The Compact of Free Association between the United States and the Republic of Palau, which entered into force in 1994, provided for several types of assistance aimed at promoting Palau's self-sufficiency and economic advancement. Included were 15 years of direct assistance to the Palau government; contributions to a trust fund meant to provide Palau $15 million each year in fiscal years 2010 through 2044; construction of a road system, known as the Compact Road; and federal services such as postal, weather, and aviation. U.S. agencies also provided discretionary federal programs related to health, education, and infrastructure. In 2008, GAO projected that total assistance in fiscal years 1994 though 2009 would exceed $852 million. In September 2010, the United States and Palau signed an agreement (the Agreement) that would, among other things, provide for additional assistance to Palau beginning in fiscal year 2011 and modify its trust fund. A bill, now pending, was introduced in the Senate on February 14, 2011, to approve the Agreement and appropriate funds to implement it. In this testimony, GAO updates a June 2011 testimony on (1) the Agreement's provisions for economic assistance to Palau, (2) its impact on the trust fund's likelihood of sustaining scheduled payments through fiscal year 2044, and (3) the projected role of U.S. assistance in Palau government revenues. GAO reviewed the Agreement; examined Palau's recent single audit reports and budget projections; and assessed trust fund balances and disbursement plans.

The Agreement would provide steadily decreasing assistance, totaling approximately $215 million, for fiscal years 2011 through 2024. The proposed assistance includes the following: (1) direct economic assistance ($107.5 million) for Palau government operations; (2) infrastructure project grants ($40 million) to build mutually agreed projects; (3) infrastructure maintenance fund ($28 million) for maintaining the Compact Road, Palau's primary airport, and certain other major U.S.-funded projects; (4) fiscal consolidation fund ($10 million) to assist Palau in debt reduction; (5) trust fund contributions ($30.25 million) in addition to the $70 million contributed under the compact. The legislation implementing the Agreement was not approved by Congress in fiscal year 2011. Under the Agreement, the United States would contribute to the trust fund in fiscal years 2013 through 2023, and Palau would reduce its withdrawals by $89 million in fiscal years 2010 through 2023. GAO projects that the fund would have an 86 percent likelihood of sustaining payments through fiscal year 2044 with these changes, versus 24 percent without these changes. Estimates prepared for the Palau government project declining reliance on U.S. assistance under the Agreement--from 28 percent of government revenue in fiscal year 2011 to 2 percent in fiscal year 2024--and growing reliance on trust fund withdrawals and domestic revenues. The estimates show trust fund withdrawals rising from 5 percent to 24 percent and domestic revenues rising from 40 to 59 percent, of total government revenue. According to the estimates, U.S. assistance in fiscal years 2011 through 2024 would total $427 million, with discretionary federal programs accounting for about half of that amount.